Japan unlikely to achieve debt reduction goal in 2020: Cabinet Office

The government is unlikely to achieve its target of budget deficit reduction in fiscal 2020 even if the sales tax is hiked as scheduled and the economy is on a firm growth path, an estimate by the Cabinet Office showed Thursday.

The projection suggests that Prime Minister Shinzo Abe’s government should make more efforts to improve Japan’s fiscal health, the worst among major industrialized countries, by taking such steps as drastic cuts in social security costs and further tax rises.

Abe’s administration, formed Dec. 26, has internationally committed to halving the ratio of the nation’s primary balance deficit to gross domestic product by fiscal 2015 from the fiscal 2010 level, and to posting a surplus by fiscal 2020.

A deficit means the country cannot finance government spending other than debt-servicing costs without issuing new bonds. Improving the situation is viewed as the critical first step toward fiscal rehabilitation.

Under an optimistic scenario in which the economy would expand by an average of 3 percent in nominal terms over the next decade from the current fiscal year, the primary balance deficit would come to 2 percent in fiscal 2020, according to the Cabinet Office estimate.

In fiscal 2015, the deficit is expected to reach 3.3 percent under this scenario, or half of the 6.6 percent deficit posted in fiscal 2010, according to the projection.

But under a conservative scenario in which the economy grows by an average of 2 percent in the next 10 years, the primary balance deficit is likely to stand at 3.5 percent in fiscal 2015, falling short of the government’s deficit-cutting goal.

On Thursday, the government approved a medium-term fiscal reform plan that pledged to narrow the budget deficit by ¥17 trillion over the next two years to attain the target, with a final decision yet to be made on doubling the current 5 percent consumption tax by October 2015.

Legislation enacted last August stipulates the levy is scheduled to be raised to 8 percent next April and to 10 percent the following year.

Abe has said he will reach a final conclusion in the fall on whether to implement the first tax hike next year, regarded as key to fiscal reconstruction.